Monday, September 22, 2008

WSJ: Euro Banks Too Big To Rescue?

European banks face greater capital shortages than their U.S. counterparts, but have become too big for any one European country to save, according to an article published Saturday by European economists Daniel Gros and Stefano Micossi on the Centre for European Policy Studies’ Web site.

The “overall leverage ratio” - a measure of total assets to shareholder equity - of the average European bank is 35, compared with less than 20 for the largest U.S. banks, the economists say, and relatively small writedowns on their assets could have a devastating impact on a bank’s capital.

The problem for European regulators is that European banks rival or in some cases exceed the economic size of their native European economies, making a rescue package in Europe difficult, according to Gros and Micossi. For example, Deutsche Bank, with an overall leverage ratio of 50, has liabilities of €2 trillion, over 80% of the entire German economy.